Specifically, despite valuations that are well below book value, the firm sees increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit " and most importantly " funding.
Firm believes recent developments have led to a "crisis in confidence" that has put unbelievable pressure on secondary market demand with bids for loan pools and ABS bonds nearly evaporating. With the NEW and FMT news late Friday, the firm believes this risk is only increasing further, and they now expect profitability will be severely strained until conditions stabilize. They expect this to make it difficult for even higher quality players like LEND to remain solvent and all remaining subprime lenders will need to obtain significant covenant waivers to remain operational.
As a result, despite stocks that have fallen an average of nearly 50% since their initial cutious call (Feb 7), they believe further downside is likely, as liquidity risk is still rising. Accordingly, they have cuttheir rating to Sell from Hold on NFI, LEND, and NEW.
For CFC, while they still believe the company will take advantage of the sector turmoil, their near-term bias is also negative as they expect the disconcerting trends in the subprime sector to increasingly spread into the Alt-A and, to a lesser extent, prime sectors.
Notablecalls: Several firms are out with some pretty nasty commentary on NEW and other names. I know that many were loading up on the likes of NFI in anticipation of a bounce but now it looks like that train is going straight to hell.